Capitalization ratios, Financial Management

Capitalization ratios are used for determining the extent to which the corporation is trading on its equity, and the resulting financial leverage. These ratios are also referred to as financial leverage ratios. They can be interpreted only in the context of the stability of industry and company earnings and cash flow. It is assumed that if the industry expresses greater stability and company earnings and cash flows, it will be able to accept more risk associated witht the financial leverage.

There are many variants to calculate capitalization ratio. Some of them are- long-term debt to capitalization and total debt to capitalization

Long-term debt to capitalization = (Long-term debt)/ Long-term debt + Shareholders' equity including minority interest

Total debt to capitalization = (Current liabilities + Long-term debt)/Long-term debt + Shareholders' equity including minority interest

Commercial rating companies mostly depend on long-term debt to capitalization ratio. Though this ratio is useful, with the frequent change in interest rates, many corporations are opting to finance a good deal of business with short-term debt. Other consideration in using long-term debt to capitalization ratio involves leased assets. Though obligations on leased assets are similar to that of bond coupon and repayment obligations, they are capitalized and shown in the balance sheet.

Posted Date: 9/10/2012 9:23:40 AM | Location : United States







Related Discussions:- Capitalization ratios, Assignment Help, Ask Question on Capitalization ratios, Get Answer, Expert's Help, Capitalization ratios Discussions

Write discussion on Capitalization ratios
Your posts are moderated
Related Questions
AThe Nu-Nu Brothers Inc. (NNBI) has the following capital structure, which it considers to be optional: Debt 25% Preferred Stock 15% Common Equity 60% NNBI''''s expected net incom

Floor Brokers These people have the responsibility of executing the trades forwarded by the FCMs on the floor of the exchange. They can also trade for their own account. They w

Keys Printing plans to issue a $1,000 par value, 10-year noncallable bond with a 5.00% coupon, paid semiannually. It should sell at par. The company''s marginal tax rate is 40.00%

1. Why do you think you are asked to perform valuation given an array of discount rates? a. Would it not be more accurate to utilize, for example, CAPM to calculate cost of equi


How do we estimate expected incremental cash flows for a proposed capital budgeting project? We valuate expected incremental cash flows for a proposed project by valuating the

Your friend Peter is planning to set up a new business which will manufacture and sell wooden tables. The parts that make up the table consist of a wooden table top measuring 1m by

What are the types of theft threats?  Describe the methods to access and overcome theft threats. Types of theft threats - Mass theft, Pilferage theft. Steps to assess threats

how would you judge the potential profit of bajaj electronics on the first year of sales to booth plastics and give your views to increase the profit ?

Bond are formal certificates issued by the companies or government agencies acknowledging the indebtedness. To the investors, they are proofs of investment. In th